Tech Spending Goals Shift from Cost Cutting to Making Money

Visitors walk under the word 'Cloud' at the IBM booth at the CeBIT computing trade fair in Hanover, Germany, March 21, 2017.
Photo:
European Pressphoto Agency

Global information technology spending is getting a boost, as companies shift from seeking IT tools that support existing business processes or simply cut costs, to investing in digital capabilities that create entirely new revenue streams, according to Gartner Inc.

As The Wall Street Journal reported this week, the IT industry research firm’s latest global forecast projects a 2.4% year-over-year increase in IT spending to $3.5 trillion by the end of the year. It expects that growth to carry into 2018, hitting $3.6 trillion, up another 3.5%.

The gains are being driven by ramped up spending on enterprise software, which is expected to rise 7.6% this year to $351 billion. Spending on devices and IT services is also expected to grow, though as a slower pace, followed by data center systems and communications services, the firm said.

“The expectations of IT being changed,” said John-David Lovelock, Gartner’s vice president of research. “Their spending is now expected to support revenue growth for the company,” he said.

Mr. Lovelock recently spoke with CIO Journal about the implications of this shifting approach to IT spending and how giant tech vendors are adapting. Edited excerpts follow:

How are emerging digital tools changing IT spending?

Anything coming out of artificial intelligence--chatbots, machine learning, blockchain, virtual reality or augmented reality--I’m no longer buying a software package to do it. I’m buying software development and infrastructure in order to create it for myself. That’s helping the open-source world. As a result, a lot of this activity doesn’t necessarily show up in dollars, but it shows up in activity.

Where does cloud computing fit into this shift?

Ultimately cloud software can be configured, but it can’t be customized. So unless cloud has almost all the feature functionality a company is going to want, you can’t adapt it.

The new digital business initiatives that are coming along, those at the cutting edge, can’t go cloud. Instead it’s pulling into self-developed applications, using tool kits, but aimed at creating something entirely new.

How does IT spending differ across industries?

Everyone has a portion of digital business that’s really in their fast lane. Banking is making some of the biggest splashes around blockchain. Retail is leading in the API economy, while manufacturing and healthcare are leading in IoT.

How cost effective is this new spending strategy?

Right now you’re not getting cost effectiveness. You’re going to be overspending on the IT, because it’s not about making a current process cheaper, it’s about finding a whole new source of revenue. So we know that IT spending is going to outpace value. That’s a typical path for technology. Think about e-commerce. It took tons of money to get those early websites up, but at the time it was all about generating new revenue streams. After a while it became a whole lot cheaper. For now there’s a lot of spending going on in a learning environment.

Despite ramped up IT spending last year, you’ve said only two of the top 10 biggest IT vendors posted organic revenue growth. Why is that?

The top vendors still aren’t in the right space to capture this spending growth. While half of the IT market is growing faster than the industry average, at 3.3% this year, one third of the market is shrinking or flat. Where the top ten vendors have been over the past decade is in areas that are now shrinking, such as enterprise fixed service, printers, PCs, mobile phones, servers or IT products support. These are now negative markets.

Where we’re seeing big growth is in enterprise apps, infrastructure software and IT services. The big vendors still aren’t there enough. Many are now in transition, but still have a leg in the old world, and that’s causing a drag on growth.